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There are two sides to every story, and sometimes three, four or five. An audit by the Special Inspector General for the Troubled Asset Relief Program (TARP) claims that the Federal Reserve Bank of New York allowed banks to get 100% of the value of complicated financial instruments that they had insured with AIG (AIG). The transactions involved over $60 billion. The full report was issued today.

The inspector general Neil M. Barofsky claims that the Fed "refused to use its considerable leverage" to force major banks to make concessions on the money they were owed as part of their relationships with AIG.

Goldman Sachs (GS) was among the firms that benefited from the Fed's action while Credit Suisse (CS) actually offered to take less than 100 cents on a dollar for its insurance claims and was turned down.

Barofsky's conclusion is that, "Tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.'s counterparties."

The Fed defended its actions, of course, saying that they were meant to prevent a collapse of the credit markets. The Treasury said it did not have the right to push banks to take less than the face value of the assets that had insured with AIG. The New York Fed eventually loaned a division of AIG $23 billion to make its $62 billion in payments to counterparties including Goldman.

The Fed and Treasury still insist that they acted correctly, and that it was not their right to push banks for concessions -- a claim that now rings hollow. The Fed and Treasury pushed Bank of America (BAC) to buy Merrill Lynch, and Henry Paulson, who was Treasury Secretary during the crisis, forced banks to take TARP funds -- even if they did not need the government money. Paulson apparently thought that struggling banks that really needed the capital would not look as bad if all major financial firms participated in the program.

During that extraordinary time when credit markets were collapsing, it is hard to accept that the government stepped outside the boundaries of "appropriate" action in some cases, and did not do so in others. What is very clear is that the actions of the New York Fed cost taxpayers billions of dollars, much of which they may never get back.